90 ATC 438
MB Hogan M
Administrative Appeals Tribunal
Judgment date: 19 July 1990.
M.B. Hogan (Member)
The applications involved in this hearing comprise two from the trustee of a superannuation fund (which I will hereafter refer to as the C fund) and one from the company sponsoring the C fund, which company I will hereafter refer to as C. The applications arise from the actions of the Commissioner in assessing the net income of the C fund for each of the years ended 30 June 1983 and 1984 under sec. 121DA of the Income Tax Assessment Act 1936 and in amending the assessment of C for the year ended 30 June 1983 to reduce a deduction of $13,874 originally allowed in the assessment of C for that year in respect of a contribution on behalf of its employees made to the C fund in the year of income, to an amount of $2,236, thus limiting the deduction to an amount equal to 5% of the salaries paid to the persons in respect of whom contributions were made in the year of income.
2. The Commissioner's contention is that, in the years of income for which the assessments were raised against the C fund, the fund was not one ``established and maintained solely'' for the purposes specified in sec. 23F(2)(a) of the Act. In relation to the amendment of the assessment against C, the Commissioner contends that the amount of $2,236 is the amount allowable under subpara (ii) of para. (a) of sec. 82AAE of the Act and there are in the year no special circumstances as required by para. (b) of sec. 82AAE to justify the allowance of any amount greater than that
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provided for by para. (a). This action appears to accord with the Commissioner's guidelines as set out in Taxation Ruling IT 294, vide para. 6 of that ruling.
3. I propose to deal first with the applications relating to the assessment of the C fund under sec. 121DA, as, in the course of examining documents submitted at hearing, I have discovered on the copy of the income tax return of that fund for the year ended 30 June 1983 submitted as an exhibit on behalf of the taxpayer, the original signed certificate of an actuary to the effect that the contribution determined by him ``is that which complies with the requirements of the Australian Taxation Office''. At the hearing, counsel for the Commissioner, who obviously had not been made aware of the existence of this document, would make no concession on the score of the reasonableness of the contribution, contenting himself with making the point (correctly in my view) that no evidence had been adduced in the course of the hearing in support of the applicant's claim. I now take the view that the certificate of the actuary should, in the light of IT 294, be accepted as evidence of reasonableness of contributions in terms of para. (b) of sec. 82AAE if I were to find that the C fund should not itself have been assessed under sec. 121DA in that year.
4. Turning then to the C fund, evidence was focused on three investments by the C fund made through its trustee Mr D, who was also the managing director of the company C. Mr D stated that he made these investments on the advice of Mr P whom he described as a well known developer. The first of the investments was in the X unit trust which was in process of developing a ``fitness centre'' when the initial subscription for units in the trust was made on 23 February 1979. Mr D stated that Mr P had informed him that the ``fitness industry... was going extra well in the (United) States'', that ``we seemed to follow on the States'' and that the industry was ``just about to hit Australia''. Accordingly under a trust deed dated 26 September 1978, the X unit trust was set up and alloted units to the first unitholder. Under cl. 10.01(a) of the deed, the trustee was empowered to ``carry on anywhere in the world and either alone or in partnership all or any of the businesses set forth in the First Schedule''. The First Schedule reads in so far as it is applicable to the events which occurred:
``To develop land and water rights for subdivision and resale; to erect commercial residential and sporting buildings and of complexes thereon; to make roads, car parks, paths, gardens, tennis and squash courts, swimming pools and other amenities; to manage let and deal in same...''
The unit trust appears to have first traded in the year ended 30 June 1979, having regard to the comparative figures in respect of that year of income, furnished with the figures for the year ended 30 June 1980 in the return of income for that year. No copy of the return for the 1979 year of income was made available to the Tribunal but the comparative figures for that year in the return for the 1980 year of income make it plain that the trading in the 1979 year represents the result of trading for part of that year only. It appears from this material that the C fund was a subscriber to the X unit trust, if not prior to the commencement of business operations, at least very shortly thereafter. Generally, the fund continued as a subscriber until it finally quit the trust by disposing of its units for the sum of $1 on 11 June 1985, holding consistently during all that period units representing 9%-10% in number of all units subscribed for in the trust.
5. The history of the X unit trust development and of the other ventures associated with Mr P in which the C fund invested, was given by Mr T, an accounting executive associated with Mr P's ventures over the period covering the involvement of the C fund with Mr P's ventures. It emerged that Mr T did not join Mr P's organisation until August 1980; he had no firsthand knowledge of operations before that date and the facts set out in para. 4 have been gleaned from the evidence of Mr D and various exhibits submitted during the course of evidence. Mr T gave evidence that the sports complex was a failure and never lived up to projections. As early as 2 March 1981, steps were in progress to attempt to sell the operation, but, as he observed, ``a centre that trades at a loss was not very saleable''. In the meantime to meet the shortfalls arising from the recurring losses being experienced, loans were sought from unitholders. Later, as an inducement these loans were converted to units, a unit of face value of $1 being given for every 50 cents worth of loan converted. By the year ended 30 June 1983, the centre was let to a
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third party and believed to be trading well. In the result as at 30 June 1983, the C fund appeared in the balance sheet as an unsecured creditor for the sum of $7,935. By 30 June 1984 the lessee's business had folded and the C fund had disappeared as an unsecured creditor but had subscribed for a substantially increased number of units. On 18 June 1985 the directors of X unit trust redeemed the units of certain unitholders (among them the C fund) and the fund's investment in the trust ceased. The Tribunal was given to understand that the units were surrendered for an amount of $1 and a loss of some $76,341 was recorded in the income and expenditure of the C fund for year ended 30 June 1985 in respect of its interest in the X unit trust. In relation to the loan of $7,935 shown as advanced by C to the trust in the year ended 30 June 1983, Mr T was to observe that his recollection was that ``everything was converted to equity until the unitholders were bought out...''. He stated further that the C fund received a release in respect of guarantees it had given in relation to the building loan as part of the arrangements under which its units were redeemed. He also stated that Mr D did not receive any benefits in relation to the C fund's investment in the X unit trust and that there were no collateral advantages or benefits for Mr D from the investment.
6. The second venture of the C fund to which the attention of the Tribunal was directed, was another venture in real estate development recommended by Mr P to Mr D. The investment involved the taking up of 10,000 units of $1 each in the Z unit trust and the first investment was made during the year ended 30 June 1979. It appears to have some contemporaneity with the investment in the X unit trust, the three unitholders in Z unit trust (each holding 10,000 units) being also substantial unitholders in X unit trust. In addition to its subscription by way of units, the C fund also loaned to the Z unit trust as from the year ended 30 June 1979, a sum of $6,667 according to the accounts prepared for the Z unit trust for that year. The accounts prepared for the C fund for the 1981 year show in the comparative figures for the year ended 30 June 1980 that the loan at that date was only $4,667 but that it had risen to $6,667 by 30 June 1981. Attention was not drawn to this discrepancy at the hearing so there is no explanation of the differing versions of the loan in the sets of accounts prepared by different accounting firms. The trust invested its funds in the acquisition of real estate in an area where according to Mr D ``prices were skyrocketing''. It acquired an area on which some flats had already been erected and in the years ended 30 June 1980, 1981 and 1982 proceeded to erect further flats on the area acquired, selling the whole over the years ended 30 June 1982 and 1983. The C fund's units in the Z unit trust had been redeemed by 30 June 1984. No funds other than the initial subscription for units ($10,000) and the loan to provide working capital ($6,667 by 30 June 1981) were advanced by the C fund which in the years ended 30 June 1982 and 1983 received substantial distributions of profits. In so far as it may be relevant to the Commissioner's decision to assess the C fund under sec. 121DA in the years ended 30 June 1983 and 1984, it is to be noted that the C fund had ceased to be a lender to the Z unit trust by 30 June 1982. In the year ended 30 June 1982, it became a borrower from the trust to the trust to the extent of $39,181 by 30 June 1982, expanding its borrowing to $44,997 by 30 June 1983. The whole situation was settled between the parties by 30 June 1984, the C fund having surrendered its units in the Z trust. It is clear that, for both the years ended 30 June 1983 and 1984, the C fund's investment in the Z trust took the form of a net indebtedness. Mr D explained the borrowings as having been made to provide funds for a further investment made on the recommendation of Mr P in shares in a caravan park on a future development site in a select area. Before turning to deal with that investment which was also one which prompted the Commissioner's decision to assess the C fund, I believe it is desirable to summarise the result of the investment in the Z unit trust as seen in the accounts of the C fund.
7. Mr D, in his evidence, evinced a belief that the investment in Z unit trust made by him as trustee of the C fund had been a profitable one, a proposition which was not challenged by counsel for the Commissioner. However, when one examines the accounts of the C fund, it is plain that there was an overall loss in excess of $4,000. The fund did receive distributions or profits in the 1981 and 1982 years totalling $21,640. Against this must be offset payments of interest made by the fund to the trust in the
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years ended 30 June 1983 and 1984 amounting to $21,612 and a payment to settle claims emerging from a bungled property sale in the year ended 30 June 1982 of $4,167.
8. I turn now to the third of the investments which attracted unfavourable attention from the Commissioner. As I have already noted in para. 6 it was made on the advice of Mr P to acquire a substantial parcel of shares in a caravan park being conducted on a prime future development site, the parcel of shares being the equivalent of a 30% interest according to Mr T. Mr T explained that the three unitholders in the Z unit trust joined forces once again to take up this parcel of shares at an agreed valuation. The vehicle used to acquire the interest was a proprietary company which I will henceforth call M nominees. Each of the three parties took up two $1 ordinary shares in the company and each advanced by way of loan the sum of $100,000 to the company. The company was formed in the year ended 30 June 1981 and acquired the parcel of shares in the caravan park for the sum of $300,000. It continued to hold the shares through until the year ended 30 June 1984 when the shares were reacquired by the original owner of the shares. I give the details of the purchase and sale of the parcel of shares through the agency of M nominees from the evidence of Mr T. The shares were offered to Mr P through a person whom I will refer to as Mr R. It appears Mr R had acquired a substantial share interest in the caravan park operation but the park operated at loss which was being borne by Mr R. He was desperate, according to Mr T, to turn around the loss and offered a 30% interest in the share capital to Mr P. As an inducement to take up the shares which it may appear were valued having regard to the future value as a development proposition of the land on which the park operated, Mr R offered to pay $125,000 in cash to Mr P. In the event the shares were acquired by M nominees but the ``inducement'' was split three ways between the three shareholders in M nominees. Thus in the case of the C fund an entry appears in the balance sheet of the fund for year ended 30 June 1981 under the heading of members' funds entitled ``Capital Receipt... Pty. Ltd. $41,666''. The countervailing entries on the balance sheet in respect of this credit entry to members' funds were the recording under the heading of investments of the acquisition of two shares in M nominees at a value of $2 and, under the heading of unsecured loans, a loan to M nominees was recorded at $41,664. Again there is a lack of dichotomy between the two separately prepared sets of accounts (neither of which bears an auditor's certificate) in that the accounts for M nominees show the C fund to be holding two shares at $1 in the capital of that company and to be a creditor to the level of $100,000 in respect of an unsecured loan at call. By 30 June 1982, M nominees is shown in the balance sheet of the C fund to have increased its loan to M nominees to an amount of $99,998. It will be noted from para. 6 above that, by 30 June 1982, the C fund had borrowed in excess of $39,000 from the Z unit trust and was to borrow nearly a further $6,000 by 30 June 1983.
9. The evidence of Mr T was to the effect that the caravan park continued to have difficulties in trading, and, eventually, the company operating the park was required to call on its shareholders (including M nominees) for further contributions of funds. In the circumstances M nominees decided to get out of the company - a decision from which Mr D claimed he dissented but was overborne by the other parties. In a complicated and never fully explained operation, the proprietors of the caravan park company and various development projects associated with Mr P settled on a value for the shares held by M nominees. At that stage, interests associated with Mr P paid M nominees $273,585 to dispose of its shares in the caravan park company. Thus, in the year ended 30 June 1984, the C fund received two payments, one of $15,000 on 9 April 1984 and another of $76,195 on 28 June 1984 from a trust associated with Mr P. In its income and expenditure account for the year ended 30 June 1984, a ``loss on sale - M nominees'' in the amount of $8,805 was deducted under the heading of expenses. In reality, this step was tantamount to forgiveness of $8,805 of debt due by M nominees to the C fund. This last step completed the transaction in relation to the shares in the caravan park company, and, although $8,805 of debt was written off in the final analysis, it is apparent, when regard is had to the $41,666 capital contribution recorded in the 1981 accounts, that the C fund made a gain in excess of $32,500 on the overall transaction.
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10. Both Mr T and Mr D formally denied in their evidence that Mr D personally, or any entity associated with him, received any benefit, collateral or otherwise, from the investments in Z unit trust and M nominees made by Mr D was trustee of the C fund. Under cross-examination, Mr D asked to define his personal understanding of the purpose of having a superannuation fund and replied:
``I think it is fairly obvious. Like, I mean, it is a superannuation fund for yourself and your staff.''
He perceived the fund's purpose was ``to provide money on retirement''. Challenged that he regarded the fund also as ``an investment vehicle'' for himself, he replied:
``I would not say it was an investment vehicle. I was trying to make as much money as I could for the superannuation fund, so I suppose that includes me and everyone else in the superannuation fund.''
Under cross-examination, the main thrust of the Commissioner's attack on the administration of the fund by Mr D was centred on his failure, at any time, and most relevantly in the years the subject of applications on behalf of the C fund, to insist on payment of interest on moneys advanced by way of loan by the fund to the various ventures to which Mr D as trustee had committed it. Mr D professed ignorance of a cl. 5(1)(a) inserted in the superannuation fund trust deed by an amending deed dated 9 June 1983, which clause empowered the trustees to invest moneys available ``in deposits with interest'', a more restrictive clause than its predecessor introduced some 13 months earlier which permitted such investments to be ``with or without interest'', a clause which reiterated the power so to invest first spelt out in an amending deed dated 4 June 1980. He admitted that he was ``relatively unaware of the fine print with respect to payment of interest on loans'' and indicated that, in so far as the technical operation of the deed in relation to the fund was concerned, he relied on the advice of the superannuation consultant who kept a general oversight of the operations, a Mr M with whose evidence I will deal shortly. However, Mr D made it plain that he did not consult with Mr M as to the investments made in consultation with the developer Mr P.
11. The evidence of Mr M was to the effect that he had long experience in life assurance, in particular superannuation, with a leading life assurance company, but, for the past 15 years, had conducted a private business as a superannuation consultant. He was not consulted about any of the three investments to which the Commissioner had directed his attention. They were all made by Mr D in his capacity as a trustee and Mr M did not become aware of them until he was preparing his recommendations as to contributions etc. when reviewing the year's operations. Generally his evidence lacks specificity as to matters to do with the investments being considered here. His reaction, based on experience, was that he could see little wrong with investment in property or property trusts, such as the X and Z unit trusts, as it was common practice for small private superannuation funds so to invest. His only specific recollection was of a difference with Mr D's accountant over a reply to the Taxation Office. The accountant had stated in relation to the loan to M nominees that there was no written loan agreement and that the interest rate was ``nil''. Mr M had raised the question of no interest on that loan with the previous accountant who advised Mr M, after enquiries had been made, that the situation was that no interest could be collected - a nice exercise in semantics.
12. I must record that I found the evidence of Mr B, a superannuation expert called by the Commissioner, of little help in dealing with these applications. He expressed laudable views as to guidelines for trustees in making investments but could add nothing with certainty as to the specific investments here under microscopic investigation. His most enlightening remark was in explaining that the sole purpose test in sec. 23F(2)(a) ``was to ensure that the fund was providing benefits to members or dependants and that was the sole purpose or rationale behind establishing a superannuation trust'' - a more elegantly phrased explanation than the pragmatic views advanced by Mr D in dealing with the same question. His views of client funds who invest first and ask advice afterwards would have found a sympathetic chord with Mr M. Generally I found the evidence of the expert witnesses unrewarding due no doubt to Mr D's habit of acting first and leaving his professional advisers to raise what questions they could from the accounts prepared some months later. Generally, I would record as my view from the
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evidence given by Mr D that he was an aggressive businessman who was acting outside his normal milieu in dealing with his responsibilities as a trustee making investment decisions on behalf of the superannuation fund. He is a brusque man not given to any deep consideration of the long-term outcome of his actions, nor given to seeking advice from his professional advisers in reaching investment decisions. He was overly influenced by business acquaintances, preferring their proposals to advice from his professional advisers and he was drawn because of this into investment in a minor role in development type propositions, a practice which was to cost the fund dearly in the long run, vide the large loss on the investment in the X unit trust, the overall loss emerging from the Z unit trust venture and the moderate return experienced from the venture in M nominees.
13. An example of most of the facets of Mr D's tendencies as a trustee/investor emerges from one transaction. Late in June 1981, the C fund acquired a considerable portfolio of mining company shares at a cost of $53,619, immediately financed apparently by bank overdraft. The portfolio consisted predominantly of a range of mining exploration companies; only small dividend receipts of $170 in 1983, $200 in 1984 and $524 in 1985 were recorded in any relevant year. The shares continued to be held through the years ended 30 June 1982, 1983 and 1984, appearing in the balance sheet under the heading of ``Shares in Public Companies''; a full schedule of shares held was provided in each year. The holding appears to have been financed by large loans from Mr D personally in 1982 and in that year and later years by very considerable loans from two businesses controlled and operated by Mr D. It appears that the Taxation Office assessed the C fund in respect of the years ended 30 June 1981 and 1982 and that a negotiated settlement of a dispute in relation to these assessments was achieved as a result of a conference between Mr D's accountant, his superannuation consultant, Mr M and an officer of the Taxation Office. In a letter dated 11 April 1984 addressed to the trustee of the C fund in care of Mr D's accountant (a copy of which letter was tendered at the hearing), the Taxation Office adverted to the conference and offered to withdraw the assessments provided the trustee agreed to dispose of all the mining company shares (other than a few nominated parcels in established operating mining companies). The letter went on to emphasise that ``... disposal is to be at the trustee's convenience, bearing in mind the avoidance of losses on sale'' and to record the expectation ``that similar shares will not be purchased in future''. A note on the schedule of shares held which accompanied the return of C fund for the year ended 30 June 1984, indicated that it was ``expected that the majority of shares held as per this schedule will be disposed of prior to 30.6.85 as required by the Taxation Department Superannuation Brisbane''. The income and expenditure account for the year ended 30 June 1985, shows the loss on sale of the shares at $19,801 and a consequential credit adjustment in relation to the write back of ``income tax previously provided''.
14. Mr D described his reasons for making the investment in the following words:
``Well, at that time, the stock market was going through the roof. It seemed to be a very good way of making money for the superannuation fund. I discussed it with brokers such as A.C. Goode and Company. I subscribe to stock magazines from Sydney, and, as I said, everything was going fine...''
and his reasons for selling:
``The tax department told me to.''
elaborating that he did not know the consequences if he did not sell and going on:
``... we received a memo from the tax department to sell the shares and they pointed out which ones we could keep.''
However, under cross-examination, he agreed he remembered something of a settlement having been reached by his accountant with the Taxation Office which resulted in an agreement to dispose of the shares at the trustee's convenience though he was quite positive that he could not remember having seen the letter of 11 April 1984 referred to in para. 13 above. The Tribunal was informed that at the time of the hearing, the accountant, who was retired, was overseas and unavailable to give evidence. There is, however, no inherent contradiction in Mr D's two versions of the sale, and, given that no attempt had been made to sell the shares by 30 June 1984 (vide the advice with the income tax return), the six months which Mr M
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recalled as being the period the Taxation Office believed sufficient to permit a spread of disposal may well have expired by the time accounts were prepared and the accountant saw Mr D. It may well be that Mr D did receive something in the nature of an ultimatum from his accountant.
15. Mr D's penchant, indeed his positive zeal for investing a considerable part of the trust funds in a manner not normally adopted by trustees, is amply evidenced by other investments made during the period reviewed in the course of hearing these applications but the Commissioner's attack in the final analysis was directed primarily to the dealings with the X unit trust, the Z unit trust and M nominees. The Commissioner saw the practice, common to all three investments, of making loans from the trust funds to each of those bodies free of interest as being ``in derogation... of the rights'' of the employees or beneficiaries under the fund. He saw such lending of moneys as clearly benefiting the borrowers, a collateral advantage to a person other than employee/members of the fund, practices which fell foul of the ``sole purpose'' test in subpara. (a) of subsec. (2) of sec. 23F, which subparagraph I quote:
``(a) the fund is an indefinitely continuing fund established and maintained solely for either or both of the following purposes:
- (i) the provision of superannuation benefits for employees in the event of their retirement or in any other circumstances of a kind approved by the Commissioner; and
- (ii) the provision of superannuation benefits for dependants of employees in the event of the death of the employees;
16. The attack is based on observations by Taylor J. in his decision in relation to Rollason & Anor v. F.C. of T. incorporated in his decision in the appeals of
Driclad Pty. Ltd. v. F.C. of T. (1966-1968) 121 C.L.R. 45. Rollason was one of the trustees of the Marine Plastics Superannuation fund against which assessments were raised over a period of four years. That fund was operated under the deed governing the Driclad fund. In support of the assessments, the view was advanced that in loaning the moneys of the fund at interest back to various companies of the Driclad group, ``the trustees were not applying the fund for the purpose for which it was established but rather for the benefit of the companies concerned'' at p. 62. His Honour went on to say in a rather convoluted sentence:
``I do not say that if it could be shown that the trustees, in exercising their powers of investment, were applying the fund in derogation of, or, so as to defeat, the rights of employees in the fund as constituted, the conclusion would not follow that the fund was not being applied for the purpose for which it was established.''
But I think the argument advanced on behalf of the Commissioner goes too far in the circumstances of this case in interpreting what Taylor J. may have intended to be held as a derogation of rights in the passage quoted above.
17. It is to be noted that, in the appeal to the Full Court of the High Court against Taylor J.'s decision in Driclad (supra) in so far as that decision applied to the B section funds, Barwick C.J. and Kitto J. in their joint decision (in which decision McTiernan and Menzies JJ. agreed ``entirely with the reasons published... upon questions of substance'' at p. 69), dealt at some length with what might be considered a derogation of rights of employees. At p. 67, their Honours noted that the decision in
Compton v. F.C. of T. (1965-1966) 116 C.L.R. 233 made it plain that sec. 23(j) required that a fund be exclusively for the benefit of employees to qualify for exemption from income tax and that sec. 66 contained ``a very precise requirement'' for purposes of obtaining deductions under that section in that payments made to the funds must be for the purpose only of making provision for benefits of employees. They then went on:
``If, therefore, it were the case that the payments were simply made to the trustees of a fund, and, that the fund had been established from which such benefits are to be provided and for another purpose as well, e.g., to return to the company as loans payments made by the company to trustees, we ourselves would think that the income of the fund would not be within s. 23(j) nor would payments to the fund be allowable deductions under s. 66. So, for instance, if a deed were to contain a clause requiring the
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trustees to lend to taxpayers the payments made by them to the trustees as and when made, and to do so at favourable rates of interest, we would think that much could be said against treating such a deed as constituting a fund falling within either s. 23(j) or s. 66.''
Their Honours developed these propositions further in their application of the propositions to the matters before them, observing at the top of p. 68:
``In this case, evidence has shown that the bulk of the moneys in the hands of trustees were lent to the taxpayers making the payments, but, although the deed permits this, it does not require it, and attention was not directed to the question whether or not there was, towards the end of the financial year, an arrangement whereby payments were made to avoid tax liability and moneys which would otherwise have had to be found to meet that liability were paid to trustees for the benefit of employees and also for return to the companies as loans, with the advantage of the payments being, by terms of the deed, ultimately secured to the shareholders of the companies.''
From all of which I deduce that, for there to be a derogation of the rights of employees as contemplated by Taylor J., there has to be found, either in requirements placed on the trustees by the deed in the conduct of their investment program, or established by consideration of the facts of the manner in which the trustees' investment program has been conducted, a clearly defined purpose (my emphasis) of benefiting some party or parties other than the employees or their dependants. It seems to me to emerge that an incidental, but not purposeful (my emphasis) benefiting of someone other than the employees and their beneficiaries by the trustee in the conduct of their investment program cannot be seen, of itself, as a contravention of the sole purpose test seen to arise under sec. 23(j)(i) in the decision in Compton (supra) and later enshrined in the statute by sec. 23F(2)(a). So much seems to emerge also from the comment by Taylor J. in his decision in Rollason (supra) at pp. 61-62 where, speaking of the investments made there by the trustees, he said:
``It may be true that the moneys, when lent, were used by the companies in their respective businesses but it is erroneous to say that the evidence reveals that the trustees were not applying the fund for the purpose for which it was established but, rather, for the benefit of the companies concerned.''
Those remarks immediately precede the passage quoted above at para. 16 from which the concept of derogation or rights emerges.
18. Turning to the facts of these applications, I have to deal with the events of two years, the years ended 30 June 1983 and 1984, in which the Commissioner has seen fit to assess the income derived by the C fund. The position of the fund in each of these years vis-à-vis the three entities to which the Commissioner directed attention, was (as summarised from the balance sheets of the C fund at 30 June 1983 and 1984):
Year ended X unit trust Z unit trust M nominees
1983 Unsecured loan to Net debtor to the Unsecured loan to
trust of $7,934.50 trust in the sum of company $10,000
1984 No unsecured loan Whole venture No unsecured loan
From various sources in the evidence, I can record the following additional facts. The unsecured loan to X unit trust was probably converted in the 1984 year to additional units - evidence of Mr T. The C fund was a net borrower from Z unit trust as at 30 June 1982 in the sum of $39,181 (accounts accompanying income tax return of Z unit trust for that year). There is a lack of dichotomy between the accounts prepared for the C fund and the accounts prepared by different accountants for Z unit trust. The C fund accounts at 30 June
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1982 show the C fund to be neither a borrower nor a lender in relation to Z unit trust. It is clear that, for the year ended 30 June 1983, C fund was not a lender vis-à-vis Z unit trust. The situation with M nominees in the year ended 30 June 1984 is that the fund's loan was repaid as to $91,195 in two instalments, one of $15,000 on 9 April 1984 and the second of $76,195 on 28 June 1984, the balance of the loan being written off as at 30 June 1984. The C fund was for almost the whole period a lender to M nominees.
19. I have formed the opinion that there is nothing in the circumstances surrounding the advances made successively to X unit trust, Z unit trust and M nominees that encompassed a positive purpose of advantaging any one of those entities at the expense of members of the C fund. In so far as X unit trust was concerned, the trust traded or operated at a substantial loss in every one of the years reviewed in the course of the hearing. As Mr T said in his evidence there would have been no point in charging interest ``because the whole centre whether it be the operator or the owner... was basically operating at a loss''. In so far as Z unit trust was concerned, in the years relevant to these applications, the C fund was not a lender to the trust; it was in fact a borrower from the trust, drawing its profits in anticipation in order to finance its venture into M nominees. Mr T's evidence makes it plain that, in development ventures sponsored by Mr P, the purpose in charging interest on loans made to investors was to maintain equality of investment by the parties concerned. He stated in relation to the interest charged to the C fund on moneys borrowed from the trust, that the purpose of charging such interest was ``to equate the proportion of monies put in by the parties'' going on to elaborate that ``if one (party) puts in more money than another... it would not be fair to offer the party putting in more money that they would not be paid interest on it''. Thus, in developments sponsored by Mr P's group, it was the practice to pay interest as between the parties only in those instances where the balances of investment agreed between the parties had been disturbed. This explanation clearly covers the situation in M nominees. There Mr T was to point out additionally that the company had no cash flow out of which to pay interest; it was therefore impractical to seek interest on the funds loaned. I am of the view that the non-payment of interest on moneys loaned in all these instances, arose from practical commercial considerations in each case and not from any desire or intent on the part of Mr D as trustee of benefiting the entities to whom the funds were loaned, with resultant disadvantage to the members of the C fund.
20. There remains the point that Mr D as trustee may appear to have been in breach of the trust deed governing the C fund in so far as he continued the loans of the fund's moneys without interest to X unit trust and M nominees after the insertion of cl. 5.1(a) by the amending deed dated 9 June 1983 (vide para. 10 above). The evidence indicates that Mr D was unaware of the clause, a fact which is in line with the lack of attention to detail evinced by Mr D in his exercise of the investment function in carrying out his duties as trustee of the fund. But it goes no further than that; they were not new investments taken up in breach of the deed. The fund was and had been for some years bound into those investments; commercial reality did not permit their rapid liquidation, and, as I have found, they are not evidence of Mr D seeking to derogate from the rights of the employee/members of the fund.
21. I have therefore come to the conclusion, for the reasons set out above, that in each of the applications on behalf of the C fund, the decision of the Commissioner on the objections should be set aside and the objection allowed in full. In view of these findings and the views which I have canvassed at para. 3 of these reasons, I would also set aside the decision of the Commissioner on the objection which gave rise to the application on behalf of the company C and allow that objection in full.